STORY: Hampton police ran profitable cigarette business

HAMPTON — For more than a year and a half, Hampton police officers ran an undercover cigarette business.

Tens of thousands of dollars at a time would change hands inside a nondescript industrial warehouse off Aberdeen Road, as the department's "Blue Water Tobacco" company sold discounted cigarettes by the case.

Though the operation was a sting staged to crack down on the lucrative black market in tobacco, Hampton police officers did not make a single arrest or file any criminal charges over the course of the 19-month investigation.

Millions of dollars, however, flowed through Blue Water Tobacco's account, according to documents obtained by the Daily Press under open records requests. Some of that money was spent on new SUVs, electronics, and travel costs for "conference and training" trips to New York, Washington, D.C., and Las Vegas.

For the past seven months, three of the police officers involved with the undercover operation have been under scrutiny. Those officers, including a major who is one of the police department's highest-ranking officers, were put on administrative leave with pay on Feb. 23 following allegations of misconduct.

In an Aug. 1 email obtained by the Daily Press, City Attorney Cynthia Hudson told the City Council that Police Chief Charles R. Jordan Jr., in consultation with City Manager Mary Bunting, "terminated the undercover operation immediately upon learning of alleged misuse of funds and personal property by some of the assigned employees."

The documents the city provided to the Daily Press do not indicate who made or approved the financial transactions from Blue Water Tobacco's checking account.

Bunting wrote in an email that such approvals came at "varying levels of the (Police) Division," with Jordan saying he approved some of the major expenditures and other officers signed off on other transactions.

In an interview last week, Jordan said the misconduct complaint came in at 4:30 p.m. on Friday, Jan. 27, from a trusted officer within the operation. "It was all shut down," Jordan said of the operation.

On Feb. 9, Jordan requested that the Virginia State Police open a criminal investigation into the allegations.

"This was the first time in Hampton Police Division's history that an outside agency was utilized to conduct a criminal investigation, but it was done given that some of the officers involved were of high rank," Bunting wrote in an email. "It was our goal to ensure that there would be no doubt as to the completeness or thoroughness of review."

Months later, two State Police financial investigators turned their file over to the Hampton Commonwealth's Attorney's Office for further review.

In mid-June, Acting Hampton Commonwealth's Attorney John F. Haugh determined no criminal charges were warranted in the case. "There was no evidence uncovered that there was anything criminally wrong," Haugh said.

But a separate administrative investigation into the misconduct allegations remains under way to determine if city policies were violated or whether officers failed to meet "performance expectations," according to Hudson's email to the council.

More than $3 million flowed through the undercover operation between its inception in June 2010 — with origins as a joint federal and city operation — and its abrupt end earlier this year.

After the undercover company paid for its product — the cigarettes — and all other expenses and debits, the firm's checking account at Langley Federal Credit Union had a balance of $718,496 as of Aug. 30, according to city records.

The city's documents show purchases of, among other things, nine vehicles; XM-Sirius satellite radio subscriptions; and plane flights, hotel accommodations, steakhouse dinners, "show tickets" and other costs related to what the city says were training trips to New York, New Jersey, Northern Virginia, Washington, D.C., and Las Vegas.

The documents show several "cash withdrawals" — sometimes thousands of dollars at a time — from the account, with no additional details provided to the Daily Press about the withdrawals.

The company also spent $394,341 for nine new vehicles, at an average price tag of $43,815.

Several of the vehicles were unmarked SUVs, sources have said. But citing the undercover nature of the cigarette operation, the city would not provide the make and model of those vehicles, or say which officers drove them, where the vehicles were purchased, or why they were necessary.

Jordan said he wasn't assigned one of the vehicles, though he did test one out. "I drove one of them a couple days ... to see what they bought," he said.

As for where the vehicles are now, Bunting — who declined to be interviewed for this story but answered some questions by email — wrote that all money, vehicles and other property in the case are frozen and "in the possession and safekeeping of the city." The Hampton commonwealth's attorney, she wrote, is now reviewing what should be done with them "as a matter of the application of state forfeiture law."

The city and police department would not explain why the undercover operation made no arrests over 19 months.

The City Attorney's Office, however, contends that arrests are still possible elsewhere. "Efforts in other jurisdictions are still under way that may result (or may have already resulted) in arrests related to the work by Hampton officers," Hudson said.

Hudson has not responded to questions about which jurisdictions might have made arrests or have them forthcoming. Bunting said the undercover cigarette operation was conducted "in conjunction with other law enforcement agencies," but she would not identify those agencies.

Jordan said the operation's goal was always to make arrests. He acknowledged that significant money flowed through the operation, but said his goal was always stopping crime.

"The money was never an issue with me in pursuing criminal activity," he said.

"This type of case generates just a lot of money. The amount of money, it looks like tons and tons of money. But you know what? Whether its $10, or $100,000, it's not our money. The amount of money was never as much of an issue as (that) we respect that it's not ours."

A large problem

Interstate cigarette trafficking is a growing national problem that stems from the fact that state and local excise taxes on cigarettes vary widely around the country.

Taxes are far higher than average in some states, particularly in the Northeast. They are far lower in other states, such as Virginia.

In New York City, for example, a pack of cigarettes carries state and local excise taxes of $5.85 — virtually doubling the price tag. In Hampton, the comparable state and local excise taxes come to $1.10 per pack.

Given those disparities, people can turn huge profits simply by buying cigarettes in low-tax states and taking them to a high-tax state for resale. The profits are even larger when they don't pay any taxes.

But there are strict rules limiting the number of cigarette cartons that can legally cross state lines, leading to joint law enforcement efforts — including other recent initiatives in Virginia — to crack down on trafficking.

Hampton's undercover initiative began in June 2010 as a joint investigation between Hampton and the federal Bureau of Alcohol, Tobacco, Firearms and Explosives. The partnership began after an ATF special agent came to Hampton with the idea. Bunting wrote last week that cigarette makers also separately approached the city about running such an operation.

The operation's goal, Bunting wrote in an email, was to crack down not only on interstate cigarette trafficking, but also related crimes. The Virginia Crime Commission, for example, recently said cigarette smuggling not only deprives states of tax revenue, but is sometimes tied to cigarette counterfeiting and organized crime.

"The Hampton Police Division agreed to participate in the operation with the intentions of tying illegal cigarette sales to violent criminal activity, specifically illegal firearms crimes, taking place within the City of Hampton," Bunting wrote. "These goals were discussed at the onset of the operation with ATF and U.S. Attorney's Office."

Jordan expressed a similar sentiment.

"This was not and never was a situation where we were focusing purely on the illegal cigarette trade," he said. " This all centered around how can we tie this kind of new breed of criminal activity and money laundering to drugs and guns coming back and affecting our community."

The undercover company was initially registered as "Olde Town Smokes." A post office box was set up at a UPS Store near the AMC movie theater off Big Bethel Road. A warehouse was leased on Mingee Drive, off Aberdeen Road, not far from Copeland Industrial Park.

"Coming in mid-September 2010 I will be opening a warehouse conveniently (located) off I-64 and I-664," said one online advertisement posted by an ATF agent. "I try to accommodate all requests, but request orders are 50 cartons or more."

In a signal that the cigarettes were being sold tax-free, the ad said that "state tax stamps are available upon request for an additional cost."

The ATF — which purchased cigarettes from Richmond-based Philip Morris at a substantial discount — stocked the warehouse and covered the initial warehouse lease. No Hampton tax dollars were put into the operation, Bunting said, save for the salaries of the handful of officers involved.

Customers soon began coming to the warehouse. After loading their purchases into their vehicles, they would get back onto Interstate 664 and head home.

The joint operation lasted only four months before Hampton police officers learned in October 2010 that the ATF agent partnering with them on the case was corresponding with a customer on the side. Hampton reported the matter to the ATF. The agent was later found guilty on five counts, including embezzlement, and sentenced to 37 months in federal prison.

The ATF immediately backed out of the operation, but Hampton continued the undercover effort.

Who has oversight?

As for who approved the expenses, Jordan said he got involved on some "major expenditures" that "only I could authorize," but let what he termed "day-to-day" expenses be handled by other staffers. "I didn't sign off on everything they did, no," he said.

Bunting would not tell the Daily Press whether she or the city's finance director, Karl S. Daughtrey — or anyone outside of the police department — were aware of Blue Water Tobacco's bank account or approved its expenses.

Bunting wrote that the police division hired an accounting firm to train the officers in the use of accounting software and money handling procedures, and that officers "were expected" to adhere to city policies on expenditures. "There was a goal from the outset to ensure that best accounting principles were followed," she wrote.

But the Hampton City Council — the board that approves the annual police and city-wide budget — was not notified about the cigarette operation until months after it ceased, several City Council members told the Daily Press.

They were first apprised of the operation by way of Hudson's email on Aug. 1, which was sent the night before the Daily Press published a story about the three officers being placed on leave.

Even then, the details provided to the council were scarce. Several council members said they were not told, for example, about the Blue Water Tobacco checking account containing more than $718,000.

"City Council is not normally briefed on operational details of police business or day-to-day operations of most city departments," Bunting wrote in an email. She said it was the City Council's job to set "broad policies" and her and her staff's job "to implement those policies and strategic vision."

"I appreciate that you'd like to know more, but I'm sure you understand that it's not appropriate to discuss matters that are under internal investigation until that process is concluded," Bunting wrote.

Bunting also asserted that answering questions about the case could compromise undercover operations and therefore "would not be in the public interest."

"We — and other law enforcement agencies — do not release details of undercover operations for at least three reasons," Bunting wrote. "It would jeopardize the safety of the officers involved; it would jeopardize related ongoing investigations by other agencies and/or jurisdictions; and it would jeopardize future Hampton undercover efforts on others by sharing details on how such probes work."

The fallout

As part of the internal investigation into the officers' conduct, one of the department's highest-ranking officers, Maj. Kenneth R. "Randy" Seals — a 28-year department veteran — has been on paid leave for more than seven months.

Seals, 50, of Hampton, is one of four majors answering directly to Jordan. A former operations commander, he has more recently been the commander of "professional standards," which includes training, recruiting, accreditation and overseeing complaints against police officers.

Based on his annual pay of $88,888, Seals has been paid more than $56,000 during his time at home. Police say there's no date set for him to return to work.

The two other officers also placed on leave on Feb. 23 were Lt. James R. Crotts, the former commander of the special investigations unit for vice narcotics; and Cpl. Christopher J. Lyon, a 14-year veteran of the department who worked as a detective in the special investigations unit under Crotts.

Crotts, 51, of Isle of Wight, a 24-year veteran in Hampton, retired on April 1, only six weeks after being put on paid leave. After five months on paid leave, Lyon, 41, went back to work on "full duty status" on July 23, though the investigation continues.

Both Seals and Crotts have declined several requests from the Daily Press for comment for this story. Lyon declined to comment through a police spokesman.

Following the money

The Daily Press is still asking for a full public accounting of the millions of dollars that came through Blue Water Tobacco and its predecessor company, Olde Town Smokes.

Neither the city nor the ATF has so far provided the monthly bank statements for the last six months in 2010, which covers most of the time when the cigarette investigation was a joint effort with the ATF.

An initial set of records provided by the city — partially redacted credit card and debit card bank statements and a five-page "summary sheet" created by the City Attorney's Office — show large cash flows in and out of Blue Water Tobacco's account at the credit union.

Some of the detailed supporting receipts for the bank account transactions have been provided, but many other receipts have not been turned over.

At the beginning of 2011 — just after the ATF and the city parted ways on the investigation — the account had a balance of $765,779, according to city records. Though the ATF had initially supplied the cigarettes, the agency allowed Hampton to keep the funds when it backed out, said Richard Marianos, the ATF's special-agent-in-charge over the Washington Field Division.

Since that time — between January 2011 and August 2012 — documents show deposits of $3.1 million and debits of $3.15 million into the undercover firm's checking account.

The documents show hundreds of thousands of dollars at a time being "wired out," while deposits of tens of thousands of dollars at a time were coming in.

The "wired out funds" presumably include purchases of the company's cigarette product, while the "deposits" presumably include the proceeds from undercover cigarette sales. But the recipients and sources of those cash transfers are not spelled out in the monthly bank statements.

Training trips

Between March 2011 and January 2012, $30,341 in travel expenses were billed to Blue Water Tobacco's checking account, according to the summary provided by the city. That includes $11,057 in travel costs "in furtherance of operation" and another $19,284 in "conference and training travel expenses" to other locations.

The conference and training travel, the summary statement said, included six trips — two to Las Vegas; and one each to New York, New Jersey, Northern Virginia and Washington, D.C.

One of the Las Vegas conferences, in April 2011, was the "8th International Conference on Asian Organized Crime and Terrorism," the City Attorney's Office said. A trip to Washington, D.C. in January was for a conference called "TMG Tobacco Expo."

The city has not answered questions about the purposes of the other four "conference and training" trips.

The monthly bank statements also show several "cash withdrawals" — thousands of dollars at a time — from the company's bank account, with no indication as to who made the withdrawals or why the cash was needed. Hudson said those details are being withheld "as part of the administrative investigation" into the officers.

The City Attorney's summary sheet shows that the cigarette funds also paid for $54,848 in insurance fees, $49,624 in "office expenses" — including facility cost, office supplies and security — and $10,717 in gasoline between March 2011 and January 2012.

Also charged to the Blue Water Tobacco account were $33,490 in "equipment purchases" — including electronics, communication equipment, "and other equipment used in furtherance of the operation," the summary sheet stated.

By the end of January 2012 — just after the undercover operation was closed — Blue Water Tobacco's account contained $508,538, according to that month's checking account statement.

That balance jumped to $723,659 by the end of March, courtesy of a deposit of $223,239 made on March 1 from an undisclosed source. Over the next five months, the account has fallen only slightly, to $718,496, mainly because of ongoing utility bills.

As for what will happen to that pot of cash now, Bunting wrote that all property related to the cigarette investigation is part of the commonwealth's attorney's review.

"I don't care where it goes," Jordan said of the money. "It can go to the state Literary Fund, which is what happened with drug money years ago. It can go wherever it goes. There's processes in place."

Staff writer Tara Bozick contributed to this report.

The Daily Press submitted public information requests to the City of Hampton, conducted hours of interviews, and examined dozens of documents to piece together the details of the undercover cigarette operation conducted by the Hampton Police Division. The work included poring over bank and credit card statements, as well as interviews with numerous sources both on and off the record, over the course of nearly two months.